## Bundling

• So far in this course, with the exception of predatory pricing, the courts have ruled that most low prices are considered competitive
• An interesting instance where discounts can be anticompetitive is in bundled discounts
• Consider the case of LePage Inc. v. 3M (2004)
• 3M and LePage were competitors in the market for tape
• As LePage’s market share grew, 3M started to bundle its tape with other unrelated products at a bundled discount (e.g. health care, auto care, etc.)
• The bundle discount incentivized retailers to carry 3M tape products over LePage’s
• Supreme Court: The defendant bears the burden of persuading the jury that its conduct was justified by any normal business purpose”

### Anticompetitive Bundling Example

Consider a firm (A) that bundles the following three products:

Price Cost
Pencils $4.00$2.00
Soap $6.00$4.00
Keys $5.00$2.00
• Suppose a retailer sells all three products, and if the retailer buys 1,000 of each good, then the firm offers a 25% discount
• TE stands for Total Expenditure $TE = 0.75(4, 000 + 6, 000 + 5, 000) = \11, 250$
• Suppose there exists another producer (B) of soap that can produce it at a cost of $3.00 $TE = 4, 000 + 3, 000 + 5, 000 = \12, 000$ • Thus, the bundle excluded an efficient firm from the market Consider another example that bundles the following three products: Price Cost Toothpaste$4.00 $2.00 Mustard$3.00 $2.00 Bleach$5.00 $3.00 • Suppose that the store needs 1000 units of each product • If the supplier A offers 20% discount for the bundle, the retailer’s total expenditures will be $TE= 0.8(4000+3000+5000)=9600$ • Suppose a rival bleach supplier wants to sell 1000 units to the store • Without the bundle and bleach supplied by another supplier, total expenditures of the retailer for the toothpaste and mustard will be $TE=4000+3000 = 7000$ • To compete with the bundled product, the rival bleach supplier could charge no more than$2600, or $2.6 per unit • If the rival bleach supplier was equally efficient as firm A, the marginal cost of production would be$3.00

• The equally efficient rival bleach supplier could be excluded as the maximum price that it could charge is below its cost

• Multiproduct firm could raise price as a result of bundling the discounts

• The specialty producers cannot compete because their sales will be unprofitable
• If the products in a bundle were to sold separately with 20percent discount spread evenly across each product, it would mean $3.20,$2.40, \$4.00 for the three products
• In that case the specialty producers can be profitable